Economic Update

Looking forward, the global business cycle, while still intact, is showing some signs of slowdown...

Interest rates have fallen to ever lower levels, benefiting both bonds (through capital gains) and equities (through improved absolute and relative valuation). Most of the impetus has come from central banks trying to get inflation to the levels they would prefer, but some (including in New Zealand) has also been insurance against potential economic slowdown....

Although the profit outlook for 2020 looks better, local equities are now expensive by both historical and international standards...

Cash and bond yields have dropped to new lows as central banks have sought to boost growth and inflation and as investors have sought safe assets like government bonds in a climate of high political risk from the US-China trade tensions. Lower yields have boosted the valuation attractiveness of equities, and income-oriented sectors like property and infrastructure have been in particularly high demand....

Looking ahead, the global business cycle still looks intact, though 2019 is shaping up to be a bit weaker than 2018...

Both equities and bonds have continued to do well this year. Although U.S. - China trade tensions have weighed on equities in recent days, investors in both local and global equities are still well ahead for the year to date, while investors in domestic and international bonds have also benefited from the capital gains created by largely unexpected falls in bond yields...

Equities have continued to recover from their sell-off late last year...

Many asset classes have done well for the year to date. Income-oriented asset classes like property (local and global) and infrastructure have been in strong demand; and bonds are also ahead for the year as bond yields have fallen. Looking ahead, the most likely scenario is that the world economy will ‘muddle through’ with ongoing economic growth, though the likely pace of business activity now looks slower than previously expected...